Bombay High Court
The Bank Of New York Mellon vs . on 13 December, 2013
Author: S.J. Kathawalla
Bench: S.J. Kathawalla
KPPNair -1- CP 28 of 2012
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
COMPANY PETITION NO. 28 OF 2012
with
COMPANY APPLICATION NO. 66 OF 2012
with
COMPANY APPLICATION (L) NO. 544 OF 2013.
The Bank of New York Mellon, London Branch )
formerly known as The Bank of New York, London Branch) )
a US National Banking Corporation, having its office at )
th
One Canada Square, 40 Floor, London E14 5AL, )
United Kingdom
vs.
ig )...Petitioner
Zenith Infotech Limited )
a Company registered under the Companies Act, 1956 )
having its registered office at B-52, Electronic Sadan-1, )
MIDC, TTC Area, Mahape, Navi Mumbai-400 710 and )
CIN L30000MH1996PLC 102705 )...Respondent.
Mr. Janak Dwarkadas, Senior Advocate along with Mr. N. H. Seervai, Senior
Advocate, Mr. Rahul Narichania, Mr. S. Mandal, Mr. Sahil Kanuga and Mr. Ankur
Kashyap, instructed by M /s. AZB & Partners, for the Petitioner.
Mr. Arif Bookwala, Senior Advocate, along with Mr. Zal Andhyarujina, Mr. Parag
Kabadi and Ms. Mrinalini Rajpal, instructed by M/s. Doijode Associates, for the
Respondent.
Mr. Shailesh Shah, Senior Advocate, along with Mr. Shardul Singh, instructed by
Gaikwad, for the Applicant in Company Application (L) No. 544 of 2013.
CORAM: S.J. KATHAWALLA, J.
Judgment reserved on : 21
November, 2013
st
Judgment pronounced on : 13 December, 2013
th
JUDGMENT:
1. By this Company Petition, the Petitioner seeks winding up of Zenith ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -2- CP 28 of 2012 Infotech Limited (hereinafter referred to as 'the Company'), which was incorporated on 31st December, 1996, under the provisions of the Companies Act, 1956 (No.1 of 1956) ("the Act"). The Petition is taken up for hearing and final disposal.
2. The facts leading to the filing of the present Petition are as under:
3. The Petitioner is a US National Banking Corporation, having its Office at the address given in the cause title of the Petition. The Petitioner is engaged, inter alia, in the business of providing corporate trustee services. The main object for which the Company was incorporated is to inter alia carry on the business of manufacturers and sellers of all kinds of electronic and electrical equipment and machinery including computers, data loggers, process controllers, geophysical and communication instruments, ultrasonic and microwave devices, etc.
4. The Petitioner has stated in the Petition filed on 21 st December, 2011, that the Company is indebted to the Petitioner for an aggregate sum of US $ 36,141,167.66 (US Dollars Thirty Six Million One Hundred Forty One Thousand and One Hundred Sixty Seven and Sixty Six cents only).
5. On 15th September, 2006, the Company offered US $ 33 million 3.0 % convertible bonds 2011 due for repayment or redemption in August 2011.
Similarly on 14th August, 2007, it also offered US $ 50 million 3.0 % convertible ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -3- CP 28 of 2012 bonds 2012 due for repayment or redemption in August 2012. The bonds were issued at 100 per cent of the principal amount. The Petitioner is the Trustee holding the aforesaid bonds in trust for the bondholders, who subscribed to the said bonds.
6. The Company entered into a Trust Deed dated 20 th September, 2006 in relation to the 2011 Bonds and a separate Trust Deed dated 17 th August, 2007 in relation to the 2012 Bonds with the Petitioner. Under clause 2.2 of both the Trust Deeds, it was provided that the Petitioner ".... covenants to unconditionally pay or procure to be paid to or to the order of the Trustee in London in US $ in immediately available funds the principal amount".
7. The maturity date for repayment under the 2011 Bonds was 21 st September, 2011. Prior to that, the Company on 27 th December, 2010 issued a notice to hold an Extraordinary General Meeting ('EOGM') of the Company on Saturday, 29th January,2011. In the Explanatory Statement annexed to the said notice it was inter alia provided as under:
"The Company has issued Foreign Currency Bonds of US$ 33 million in August, 2006 and US $ 50 million in August, 2007. These Bonds would become due for repayment/redemption in August, 2011 and August, 2012. The Board of Directors propose to augment the funds for the purpose in one or more of the following methods (including) through any combination thereof:::: Downloaded on - 23/12/2013 20:34:55 :::
KPPNair -4- CP 28 of 2012
(1) To borrow moneys from Domestic markets and/or
through External Commercial Borrowings upto an amount not exceeding Rs. 1,500,00,00,000/- (Rupees One Thousand Five Hundred Crores).
(ii) To sell and/or lease the business and/or divisions including the subsidiaries (wholly and partly) of the Company and for that purpose to issue debt securities / bonds, etc. in the domestic or international markets, as permitted by law so as to redeem/re-pay the outstanding Foreign Currency Convertible Bonds which would come for repayment/redemption in August, 2011 and August, 2012.
.... ...... .... .."
Pursuant to the Resolution passed at the EOGM held on 29 th January,
8. 2011, the Company sold its Remote Monitoring and Management Business ("the MSD Business") and on 26th September, 2011 made an announcement on the Bombay Stock Exchange ("BSE") and National Stock Exchange ("NSE") regarding the said sale. Since the Company failed to make the repayment under the 2011 Bonds on the maturity date i.e. 21 st September, 2011, the Petitioner on 27th September, 2011, issued an Event of Default Notice to the Company for the event of default which had occurred under Condition 11 of the Terms and Conditions relating to the 2011 Bonds. The Petitioner also addressed a notice of Cross Default to the Company stating the occurrence of a cross default in relation to the 2012 Bonds under Condition 11 (D)of the Terms and Conditions in relation to the 2011 Bonds. On 10 th October, 2011, the Petitioner also addressed a letter to the Company notifying that the 2011 Bonds were ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -5- CP 28 of 2012 immediately due and payable. On 12th October, 2011, the Petitioner addressed a Notice of Acceleration for the 2012 Bonds to the Company declaring the 2012 Bonds as due and payable due to a cross default.
On 13th October, 2011, the Company made an announcement on the BSE
9. stating that its MSD Business had been sold and acknowledged the debt. The announcement made on BSE reads as follows:
"1. The Company has defaulted on its US$ 33 Million FCCB which was due on 21st September, 2011 and is in negotiation with the bondholders to extend the time of repayment;
2. As informed to BSE earlier vide letter dated September 24, 2011, we have received all monies due from Zenith RMM, LLC except for the amount to be held in escrow part of which the Company plans to utilize for partial repayment of FCCBs."
Thus, the Company made a clear admission that the Bonds of US$ 33 Million (2011 Bonds) are due and payable and the Company has defaulted in making payment and has plans to partially repay them from the sale proceeds of the MSD Business.
10. Thereafter, the bondholders filed a Suit against the Company based on the fact that while as per the Explanatory Statement dated 27th December, 2010, the Company had acknowledged the debt due under the 2011 Bonds and 2012 Bonds and stated that funds from sale of the MSD Business will be utilised for repayment, the Company had defaulted on the Bonds. The Company filed an ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -6- CP 28 of 2012 affidavit dated 17th October 2011, opposing grant of ad-interim reliefs wherein it inter alia stated :
"3 (c ) the sale to Defendant No.2 has been completed to the knowledge of the Plaintiffs and the sale proceeds received by Defendant No.1 will be applied towards buy back/redemption of FCCBs in the interest of the Company and in accordance with the applicable law and regulations....."
Thus, the Company now also stated on oath that the sale proceeds received by the Company after the sale of the MSD Business will be applied towards buyback/redemption of the Foreign Currency Convertible Bonds ("FCCBs").
11. Since the Company failed to pay the amounts due under the bonds, despite an unconditional obligation to pay, and had sold the MSD Business and the proceeds were not utilised for repaying the debt under the Bonds, the Petitioner urgently filed a Suit before this Court being Suit No. 2865 of 2011 along with Notice of Motion seeking various reliefs including attachment of assets and deposit security. An application for urgent ad-interim relief was moved during the Diwali Vacation. On 26 th October, 2011, an order was passed by this Court requiring the Company and the other Defendants to the Suit, to disclose information regarding the sale of the MSD Business.
12. On 4th November, 2011, the Petitioner issued a statutory notice under the Companies Act to the Company stating that the following sums were due and ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -7- CP 28 of 2012 payable as on the date of notice.
(a) US$ 36,141,167.66 under 2011 Bonds;
(b) US$ 53,915,333.33 under 2012 Bonds.
In response, the Company by its letter dated 5 th November, 2011, after raising certain issues, threatened to terminate the Petitioner's Trusteeship on the specious plea that it was acting against the interest of the Company.
13. Thereafter on 15th November, 2011, the Company addressed a letter purportedly "terminating" the Petitioner as a Trustee. The Petitioner by their letter dated 18th November, 2011, replied to the termination notice stating that the purported termination is contrary to the Trust Deed and therefore void and non-est. The Petitioner pointed out that as per Clause 16.2 of the Trust Deed, termination can only be by way of an extraordinary resolution by three-fourths of the bondholders, and no such resolution has been passed. The Petitioner further pointed out that as per clause 11.25 of the Trust Deed, the Petitioner has to act in the best interest of the bondholders. The Petitioner also amended the Plaint in Suit No. 2865 of 2011 and challenged the termination of its Trusteeship, inter alia on the ground that the said termination is illegal and on the face of it null and void.
14. Upon the sale of the MSD Business, the Cloud Computing Business ("CC Business") was the only business of the Company. In the Notice of Motion filed ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -8- CP 28 of 2012 in the Suit, the Company stated that the value of the CC Business was approximately US $ 150 Million. However, the Petitioner contended that this was not the correct valuation. In view thereof, by an order dated 23 rd December, 2011, this Court appointing Ernst and Young ( E & Y) to submit a valuation report. On 14th February, 2012, E & Y valued the CC Business at INR 598 Million. In view thereof, this Court passed an ad-interim order directing the Company not to dispose of its CC Business and the Petitioner was allowed to apply for a copy of the E & Y Report. The Petitioner engaged Grant Thornton to conduct an independent valuation and Grant Thornton issued a report (G.T. Report) wherein the CC Business was valued at INR 198 to 239 crores.
15. The Petitioner filed an Appeal before the Division Bench of this Court challenging the order dated 14 th February, 2012. The Division Bench directed E & Y to submit a further report on the basis of a copy of the unaudited accounts for the quarter ending 31st March,2012, of the Company and a copy of the GT Report. E & Y on 3 rd July, 2012, filed a second valuation report where the CC Business was valued at INR 194 to INR 211 crores in place of the earlier valuation of INR 598 Million. In view thereof, the Division Bench of this Court set aside the ad-interim order dated 14 th February, 2012, and remanded the matter back to the Learned Single Judge to hear the Notice of Motion afresh at ad-interim stage based on the 3 rd July, 2012, valuation report. Pursuant to the directions of the Hon'ble Division Bench, the ad-interim application of the ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -9- CP 28 of 2012 Petitioner was heard afresh by this Court wherein certain undertakings given by the Company including the following were accepted, i.e. the Company:
(i) shall not dispose of, sell, transfer, alienate or create any third party right or interest in respect of the CC Business;
(ii) shall maintain status quo in respect of its fixed assets more particularly described in Exhibit-B to the affidavit dated 10 th May, 2012;
(iii) shall maintain status quo in respect of the money held in joint escrow account (Wells Fargo Bank, A/c. No. 83722000);
(iv) shall maintain status quo in respect of its investments aggregating to Rs. 66.01 crores;
(v) shall not utilise the loans repaid by its subsidiaries, if any, and in any event shall make their subsidiaries return an amount of Rs. 25 crores within a period of six months from the date of the order.
By the said order, this Court also granted liberty to Defendant Nos. 2, 3 and 4 therein to move this Court seeking appropriate orders if at any time they are of the view that they are entitled to claim the Equity Stake in Continuum Managed Services amounting to Rs. 39.86 crores and/or Rs. 32.27 crores held in joint escrow account. Pursuant to the said liberty granted, the said Defendant Nos. 2, 3 and 4 in the Suit have now moved an application before this Court claiming the said entire amount held in the Joint Escrow Account.
::: Downloaded on - 23/12/2013 20:34:55 :::KPPNair -10- CP 28 of 2012
16. On 25th March, 2013, the Securities and Exchange Board of India ("SEBI") passed an order against the Promoters of the Company, inter alia, directing the Promoters of the Company to furnish a Bank Guarantee for US $ 33.93 million.
The Company and its Promoters filed an Appeal dated 8 th March, 2013, before the Securities Appellate Tribunal ("SAT") challenging the order dated 25 th March, 2013, passed by SEBI. On 17 th June, 2013, the Company made a settlement proposal over a 3 year period to the FCCB bondholders before the SAT. On 4th July, 2013, the above Company Petition was mentioned before this Court for fixing a date of hearing for Admission, which was fixed for 26 th July, 2013. The Company with a view to stall the hearing for Admission, made a corporate announcement on the BSE website stating that, "The Board of Directors of the Company have formed an opinion to make a reference to the Board for Industrial and Financial Reconstruction ("BIFR") pursuant to the provisions of Sec. 15 (1) of the Sick Industrial Companies (Special Provisions) Act, 1985, as the accumulated losses have exceeded the networth of the Company as per the Audited Financial Results as at June 30, 2013". On 19th July, 2013, the Company made a corporate announcement on the BSE website publishing its audited financial results for the 9 months period ending on June 30, 2013. On 23 rd July, 2013, a 400 page reference was filed by the Company with the BIFR. On 25 th July, 2013, the Company made a corporate announcement on the website stating that, " pursuant to the decision of the Board of Directors of the Company in their meeting held on July 19, 2013, the Company has made a reference to BIFR". On 26th July, ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -11- CP 28 of 2012 2013, this Court fixed the hearing for the admission of the Company Petition on 29th July, 2013, when the Company informed the Court that a Reference has been filed by the Company before the BIFR which admittedly is not yet registered.
17. On 30th July, 2013, the above Company Petition was heard and this Court passed an order (i) admitting the winding up petition; (ii) appointing the Administrator to inter alia take symbolic possession of the Company's properties; (iii) directing advertisement of the Petition in two local newspapers, viz. Free Press Journal (in English), Navshakti (in Marathi) and Maharashtra Government Gazette ("Admission Order"). However, at the request of the Advocate for the Company, this Court directed that the Admission of the Petition shall not be advertised till 27th August, 2013.
18. In the context of the reference made to BIFR by the Company, this Court in its order dated 30th July, 2013 observed that:
As set out hereinabove, I am satisfied that the Promoters/Directors of the Company have acted dishonestly and are guilty of deliberate deception with the design of seeking unfair advantage/gain at the cost of causing loss to the Petitioner/bondholders. I also agree that any beneficent legislation passed for rehabilitating genuinely sick Companies which, because of factors beyond their control have become sick, cannot be brought to the rescue of dishonest Promoters/Directors which will in fact offer a premium/reward for ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -12- CP 28 of 2012 dishonesty, cheating and fraud, which is not countenanced by law.
I am also conscious of the fact that such dishonest promoters of the Company, more often than not, take advantage of a beneficent legislation like SICA and by taking repeated adjournments before the BIFR/AAIFR after registration of their Reference, deprive the small and bona fide creditors of the Company for more than a decade, by seeking protection under the provisions of Section 22 of the SICA. .... ... ...
There are several petitions pending in this Court since the year 1998-2000 seeking winding up of Companies which have not seen the light of day for the last 10 to 15 years, since this Court is not allowed to proceed with the matter in view of Section 22 of SICA. The Judges of this Court handling Company matters have time and again drawn the attention of the BIFR/AAIFR to the pathetic situation in which the small creditors of such Companies are placed since the last several years with no light in sight at the other end of the tunnel. However, it is trite that the function of Courts is only to interpret the law and not to legislate. As observed by the Hon'ble Supreme Court in Rishab Agro Industries Ltd. (supra), "If a provision of law is misused and subjected to the abuse of process of law, it is for the legislature to amend, modify or repeal it by having recourse to appropriate procedure, if deemed necessary.
.... .... .....
Section 16 of SICA obliges the Board to make such inquiry as it may deem fit for determining whether any industrial company has become a Sick Industrial Company in accordance with the procedure prescribed therein. In view thereof, the decision on the issue as to whether the opinion formed by the Board of Directors is honest and bona fide leading to the filing of a reference before the ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -13- CP 28 of 2012 BIFR also falls within the realm of inquiry by the BIFR under Section 16 of the SICA. In my view, any attempt by this Court to determine whether the reference filed by the Company is bona fide or not would tantamount to trespassing on the jurisdiction of the BIFR. In view thereof, though I have expressed my view viz. that the Promoters of the Company are absolutely dishonest and have siphoned away the funds of the Company in the manner set out in detail hereinabove and are responsible for the state of affairs of the Company prevalent as of date, I leave it to the BIFR to decide whether the Reference filed by the Company should be registered and/or further entertained. The only direction by this Court to the office is, to forward a copy of this Order to the BIFR for its independent consideration at the time of registering of the Reference and proceeding with the same, if so registered."
19. On 12th August, 2013, the Reference filed by the BIFR was rejected by the Registrar of the BIFR on the following grounds:
(1) The Directors Report of annual accounts for the year ending 30th September 2012 states, in general information, that the Company is a "software company engaged in manufacture, distribution, marketing, sale of software products and its services."
(2) It was observed that the items manufactured by the Company are not found in the Schedule to the Industries (Development and Regulation) Act, 1951 and consequently, the Company does not qualify as an "industrial undertaking" and falls outside the purview of the Sick Industrial Companies (Special Provisions) Act, 1986.::: Downloaded on - 23/12/2013 20:34:55 :::
KPPNair -14- CP 28 of 2012
20. On 19th August, 2013, the Company filed an Appeal before the Secretary of the BIFR challenging the order dated 12th August, 2013, passed by the Registrar of the BIFR.
On 19th August, 2013, the Company also filed an Appeal before the
21. Division Bench of this Court challenging the order admitting the Company Petition dated 30th July, 2013 ("DB Appeal"). On 23rd August, 2013, two employees of the Company filed an Appeal challenging the order admitting the Company Petition before the Division Bench of this Court("Employee Appeal").
It is pertinent to note that in the said Appeal, the employees have not taken any ground to the effect that the Cloud Computing Business of the Company is worth approximately INR 400 crores, as now alleged by them in the Application taken out by them to intervene in the present Company Petition.
22. On 26th July, 2013, the SEBI filed a SLP before the Hon'ble Supreme Court seeking leave to file an Appeal challenging the SAT order. On 27 th August, 2013, the Hon'ble Supreme Court was pleased to stay the operation of the SAT order.
23. On 2nd September, 2013, the Division Bench of this Court (Coram: Dr. D.Y. Chandrachud & M.S. Sonak, JJ.) dismissed the Appeal, inter alia, on the ground that the present case is one where the Company has admitted the debt, admitted the default and has admitted insolvency. The employees decided to ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -15- CP 28 of 2012 accept the said order and did not appeal from the same. However, the Company preferred a SLP before the Hon'ble Supreme Court impugning the said order of the Hon'ble Division Bench of this Court which was dismissed as withdrawn by an order of the Hon'ble Supreme Court dated 30 th September, 2013.
24. In the meantime, on 5th September, 2013, the Promoters/Directors of the Company filed a Modification Application in respect of the order of the Hon'ble Supreme Court in the SLP filed by SEBI staying the operation of the said order. It was contended by the Promoters/Directors of the Company that since the order passed by SAT dated 27th August, 2013 is stayed by the Hon'ble Supreme Court, the earlier order passed by SEBI would stand revived wherein in paragraph 25
(ii) the SEBI has directed the Board of Directors of the Company to furnish within 30 days from the date of the order dated 25 th March, 2013 bank guarantee (2) of a minimum tenure of one year, for USD 33.93 million (i.e. the amount of sale proceeds of the MSD Division that has been diverted as described in para 15 of the order) in the name of Securities and Exchange Board of India, without using the funds of the Company or creating any charge on the assets of the Company. It was submitted that if the promoters failed to furnish the said Bank Guarantee as ordered by SEBI their assets were liable to be attached. It was therefore submitted that the order dated 27 th August, 2013, be modified to provide that "operation of the impugned judgment shall remain stayed save and ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -16- CP 28 of 2012 except that paragraph 25 (ii) of the SEBI's order dated 25 th March,2013 shall not be enforced till further orders".
25. The Modification Application dated 10 th September, 2013, filed by the Promoters and/or Directors of the Company in the SEBI Appeal filed before the Hon'ble Supreme Court was listed and heard. The Hon'ble Supreme Court was pleased to direct that " We are not inclined to entertain this application filed by the applicant/respondent for modification of the order dated 27 th August, 2013. The application is , accordingly, dismissed. Since we intend to hear the appeal shortly and dispose it of, we extend the time period for furnishing the bank guarantee from 30 days to 40 days. List the appeal on 24th September, 2013.". The extension from 30 to 40 days expired on 21st October, 2013. In fact on 26th September, 2013, an oral application was made on behalf the Promoters of Zenith before the Hon'ble Supreme Court seeking extension of time for furnishing the Bank Guarantee beyond 24th October, 2013. However, the same was refused by the Hon'ble Supreme Court. This Court is informed by the Petitioner that to the best of their knowledge the Directors/Promoters of the Company have till date not furnished the required Bank Guarantee.
26. On 13th September, 2013, the Secretary of the BIFR rejected the Appeal filed by the Company challenging the order dated 12 th August, 2013, rejecting the Company's Reference passed by the Registrar, BIFR. The Secretary in his ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -17- CP 28 of 2012 order made the following observation:
".... It is clear that the Company was not carrying any manufacturing activities and has manipulated its balance sheet for the period ended 30.6.2013."
27. Since the Hon'ble Supreme Court by its order dated 30 th September, 2013, dismissed as withdrawn, the SLP filed by the Petitioner impugning the order passed by the Hon'ble Division Bench of this Court dated 2 nd September, 2013, on 1st October, 2013, the Advocates for the Petitioner mentioned the Company Petition before this Court seeking an extension of the returnable date. This Court passed an order extending the returnable date to 21 st October, 2013. The Company through its Advocates was present at the mentioning.
28. On 2nd October, 2013, the admission of the Petition was advertised in new newspapers viz. Free Press Journal (in English) and Nav Shakti (in Marathi). On 3rd October, 2013, the Company filed an appeal before the Learned Chairman of the BIFR challenging the rejection order dated 13 th September, 2013 passed by the Secretary, BIFR. On 10th October, 2013 the admission of the Petition was published in the October 10 - 16th , 2013 edition of the Government Gazette of Maharashtra.
29. On 21st October, 2013, the Company Petition was listed for hearing. The Advocates for the Company were present before the Court for the same. The ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -18- CP 28 of 2012 Company Application was mentioned by the Advocate for the employees in the morning at about 11.00 a.m. and was directed to be taken on Board for hearing along with the Company Petition. By an order dated 23 rd October, 2013, the Company was directed to file its affidavit in reply to the Company Petition on or before 7th November, 2013. The matter was directed to be listed on 11 th November, 2013. On 7th November, 2013, the Company served its affidavit-in- reply to the Company Petition and the above Company Petition was placed for hearing and final disposal on 11 th November, 2013 and is taken up for hearing and final disposal on that day.
30. At the time of admission of the Company Petition, the Learned Senior Advocate appearing for the Company had submitted that the appointment of the Petitioner as Trustee is terminated and therefore the Petitioner is not empowered to initiate the winding up proceedings. It was submitted that the Petitioner is not entitled to accelerate the 2012 Bonds. Relying upon Clause 11 of the Offering Circular, it was submitted that the approval of the Reserve Bank of India ("RBI") is not obtained by the Instructing Bondholders or the Petitioner Trustee and as such the Acceleration Notice to the Company is illegal and non est and cannot be acted upon. The Company also disputed the fact that the Company was commercially insolvent. It was also submitted that in view of the order passed by this Court dated 9 th October, 2012, in Notice of Motion Nos.
3520 of 2011 and 3527 of 2011 in Suit No. 2865 of 2011, the claim of the ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -19- CP 28 of 2012 bondholders is secured and the Company Petition does not deserve to be admitted and the question of appointment of Provisional Liquidator also does not arise. It was also submitted that the Company has not siphoned away any funds received from the sale of the MSD Business. All the aforestated contentions of the Company advanced at the time of the admission of the Company Petition were rejected by this Court by its detailed order dated 30 th July, 2013, the Appeal preferred therefrom before the Hon'ble Division Bench of this Court, as stated earlier, has been dismissed, and the SLP filed therefrom was also dismissed as withdrawn.
31. The Company Petition is now taken up for hearing and final disposal.
32. At the outset it is submitted on behalf of the Company that this Court ought not to proceed with the hearing of the above Company Petition, since the Company has not complied with Rules 24 and 30 of the Companies (Court) Rules, 1959 ("the said Rules"). It is submitted that this Court therefore ought to follow the procedure on default of compliance as regards advertisement and service of notice, as laid down in Rule 31 of the said Rules. Rules 7, 24, 30 and 31 of the said Rules are reproduced hereunder for ready reference:
"7. Power of Court to enlarge or abridge time._ The Court may, in any case in which it shall deem fit, extend or abridge the time appointed by these Rules or fixed by an order of the Court for doing any act or taking any ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -20- CP 28 of 2012 proceeding, upon such terms (if any) as the justice of the case may require, and any such enlargement may be ordered although the application for the same is not made until after the expiration of the time appointed or allowed.
24. Advertisement of petition.- Where any petition is required to be advertised, it shall, unless the Judge otherwise orders, or these rules otherwise provide, be advertised not less than fourteen days before the date fixed for hearing, in one issue of the Official Gazette of the State or the Union Territory concerned, and in one issue each of a daily newspaper in the English language and a daily newspaper in the regional language circulating in the State or the Union Territory concerned, as may be fixed by the Judge.
(2) Except in the case of a petition to wind up a company, the Judge may if he thinks fit, dispense with any advertisement required by these Rules.
30. Affidavit of service.- (1) An affidavit or affidavits stating whether the petition has been advertised as prescribed by rule 24 and whether the notices, if any have been duly served upon the persons required to be served shall be filed not less than 3 days before the date fixed for hearing. Such proof of the advertisement or of the service, as may be available, shall be filed along with the affidavit.
(2) An affidavit of service on a company or its liquidator shall be in form No. 7 or 8 as the case may be.
31. Procedure on default of compliance as regards advertisement and service of notice.- In default or compliance with the requirements of the Rules or the ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -21- CP 28 of 2012 directions of the Judge or Registrar, as regards the advertisement and service of the petition, the petition shall, on the date fixed for hearing be posted for orders of the Judge and the Judge may either dismiss the petition or give such further directions as he thinks fit."
33. It is submitted on behalf of the Company that Rule 24 of the said Rules requires the Petition to be advertised for not less than fourteen days before the date fixed for hearing, in the issue of the Official Gazette of the State or the Union Territory concerned. The returnable date for the hearing of the present Petition was 21st October, 2013. The advertisement in the newspapers was on time. However, the information about the returnable date and the admission of the Petition was published in the Official Gazette in the issue of the Official Gazette dated 10th October, 2013 - 16th October, 2013. It is submitted that no application for dispensation of the mandatory period as required, was taken out by the Petitioner. The Company has relied on the decision of the Division Bench of the Hon'ble Delhi High Court in the case of Lt. Col. R.K. Saxena vs. Imperial Forestry Corporation1 wherein it is held that the Petition for winding up has to be advertised before the same is placed for hearing before the Court and the exercise of discretion in Rule 24 of the Rules is confined only to the time limit for advertisement i.e. only to that part of the Rule, which says, ".......be advertised not less than fourteen days before the date fixed for hearing....". It is further submitted on behalf of the Company that not only has the Petitioner not 1(2001 107 Company Cases 401 ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -22- CP 28 of 2012 complied with the mandatory requirement of Rule 24, but has failed and neglected to comply with the mandatory requirement of Rule 30 of the said Rules. The affidavit required to be filed as per Rule 30 was admittedly not filed three days prior to the returnable date viz. 21 st October, 2013. In fact the affidavit under Rule 30 of the said Rules is dated 8 th November, 2013 and was sought to be tendered at the hearing of the Petition on 12 th November, 2013. It is submitted that the affidavit falsely states that the advertisement of the admission of the Petition was "duly published" as per the directions of the Single Judge.
34. As stated hereinabove, this Court passed an order on 30 th July, 2013 admitting the Company Petition and directed that the admission of the Petition be advertised in the Free Press Journal, Nav Shakti and the Maharashtra Government Gazette. However, at the request of the Company, this Court in the said order directed the Petitioner not to advertise the admission of the Petition on or before 27th August, 2013 and made the Company Petition returnable on 16th September, 2013. Though the Appeal was dismissed by an order of the Division Bench of this Court dated 2 nd September, 2013, at the request of the Company, the Division Bench stayed the publication of the admission of the above Company Petition for a period of four weeks from the date of its order. The SLP preferred therefrom was dismissed as withdrawn by the Hon'ble Supreme Court on 30 th September, 2013, thus rendering finality to the findings in the admission order passed by the Single Judge and confirmed by ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -23- CP 28 of 2012 the Hon'ble Division Bench. In view thereof, as pointed out by the Petitioner, an application was made before the Single Judge of this Court on 1 st October, 2013, seeking extension of the returnable date for hearing of the Company Petition, when the Advocate for the Company was present, and the Company Petition was ordered to be made returnable on 21st October, 2013. Again as pointed out by the Advocates for the Petitioner, the Petitioner has on the very same day i.e. 1 st October, 2013, contacted the advertising Agency (Bullseye Communications) for placing the advertisement in two local newspapers as directed and in the Maharashtra Government Gazette, as per the directions in the admission order.
The advertisement was published in the edition of the Free Press Journal and Nav Shakti dated 2nd October, 2013. The Maharashtra Government Gazette is issued on a weekly basis, i.e. on Thursday every week. The advertisement could not be published in the issue of the Maharashtra Government Gazette for the period from 3rd October - 9th October, 2013, to be released on 3rd October, 2013, due to paucity of time and in view of the fact that 2 nd October, 2013 was a National Holiday. The Petition was therefore advertised in the Maharashtra Government Gazette at the earliest available opportunity in the next weekly gazette for the period from 10 th October to 16th October, 2013 in accordance with the directions of this Court. The decision of the Division Bench of the Hon'ble Delhi High Court in Lt. Col. R.K. Saxena's case (supra) would not assist the Company since the facts and circumstances in which the said judgment has been passed are totally different from the facts of the present case. In Saxena's ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -24- CP 28 of 2012 case, the advertisement of admission of the winding up petition had not been placed in the Official Gazette at all. The Hon'ble Delhi High Court therefore held in that case that it was mandatory to publish the advertisement in the Official Gazette, with a view to lend authenticity to the advertisement published in the local newspapers. In that case it was held that Rule 24 was mandatory in the context of publishing the advertisement in the Official Gazette. The Court however held that it has the discretion to alter the time limit prescribed for the advertisement. It was further held that the purpose of publication of the advertisement of admission for the winding up petition is only to lend authenticity to the advertisement published in the newspapers.
35. In the present case, the advertisements have been placed in the two local newspapers as well as in the Maharashtra Government Gazette. Furthermore, though the returnable date of hearing the Company Petition was scheduled as 21st October, 2013, in fact, the Company Petition was ultimately taken up by this Court for final hearing only on 11th November, 2013 (i.e. beyond a period of 14 days). Thus the hearing of the Company Petition finally took place more than a month after the advertisement was published in the newspapers and the Maharashtra Government Gazette. No person, creditor or contributory has come forth to oppose or challenge the winding up of the Company. In the facts and circumstances of the case, it cannot be gainsaid that the Company did not have notice of the returnable date of the Company Petition. As correctly submitted by ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -25- CP 28 of 2012 the Petitioner, in any event, no harm, prejudice or injury has been caused either to the Company or to the creditors at large in view of the fact that apart from Bondholders whom the Petitioner represents, according to the Company, there are no other creditors of the Company; and in any case till date, no person, creditor or contributory has come forward and complained to the Court that it did not have sufficient time to support/oppose the Company Petition or appear before the Court to protect their interest. Again, Rules 24 and 30 of the said Rules are procedural in nature. It is well established that rules of procedure are only a hand maiden of justice and ought not to come in the way of substantive justice. Rule 31 relied on by the Company thus gives powers to the Court to pass further directions if it deems fit in cases where there is a default in compliance with the advertisement in accordance with Rule 24 and/ or Rule 30 of the said Rules. Thus, even assuming that the alleged defect raised by the Company as a defence is a valid ground, the same could be cured by further directions from this Court, inter alia, by adjourning the hearing of the Company Petition in order to allow for the passage of 14 days from the date of publication in the Maharashtra Government Gazette. However, in the present case, the advertisement of admission of the Company Petition was published in the Maharashtra Government Gazette on 10th October, 2013 and the Company Petition, although placed for hearing on 21 st October, 2013, was ultimately heard by this Court only on 11 th November, 2013. In the light of the same there was no need for such directions to be passed by this Court.
::: Downloaded on - 23/12/2013 20:34:55 :::KPPNair -26- CP 28 of 2012
36. As regards the contention raised by the Company that the Petitioner has not complied with Rule 30 of the said Rules , an affidavit dated 8 th November, 2013 under the said Rules has been affirmed on behalf of the Petitioner on 8 th November, 2013, and has been tendered on 11 th November, 2013. The Court was on vacation from 1st to 10th November, 2013, during which time the Filing Departments of the Court including the Company Department were also closed.
Accordingly, the said affidavit was filed on the first working day thereafter. Non filing of the affidavit of service three working days prior to the hearing of the Company Petition is a curable defect. In view of the sufficient compliance with the order of the Court by the Company and also in view of Rule 7 of the Rules, whereunder the Court is given powers to enlarge or abridge the time and the Court also has the power to give further directions as it thinks fit, in regard to any procedure or default in the compliance of service of notice, the delay on the part of the Petitioner in filing the said affidavit is condoned and the said affidavit taken on record on 11th November, 2013.
37. Without prejudice to the aforestated contention raised by the Company, it is next submitted on behalf of the Company that the Cloud Computing Business (CC Business) may be sold as a going concern and in the event there is any shortfall in satisfying the dues of the bondholders, other movable properties and assets of the Company be sold in order to satisfy the Petitioner's claim to the ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -27- CP 28 of 2012 extent possible. It is further submitted on behalf of the Company that if the winding up order is passed, it would adversely affect the quantum of consideration that could be realized from the sale of the CC Business. The Company accordingly submitted that the hearing of the Petition be adjourned till the aforesaid exercise is completed.
38. The Petitioner has opposed the Company's request on the ground that such a plea by the Company is nothing but an attempt to delay the hearing of the Petition in anticipation that the Company's reference under Section 15 (1) of the Sick Industrial Companies (Special Provisions) Act, 1985 ("SICA") will be registered with the Board for Industrial and Financial Reconstruction ("BIFR") and the stay under Section 22 of the SICA will operate in respect of the proceedings under the present Company Petition. It is submitted on behalf of the Petitioner that the conduct of the Company is not bona fide throughout and the hearing of the Petition if adjourned, will act against the interest of not only the Petitioner but also the shareholders of the Company as well as the workers.
39. From the manner in which the Company has raised one or the other technical objections pertaining to the procedure purportedly not followed by the Petitioner qua the present Company Petition, I have no doubt that the Company is determined to leave no stone unturned in attempting to delay the hearing of the Petition. The submission of the Petitioner that the aforestated ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -28- CP 28 of 2012 suggestion/submission advanced on behalf of the Company is again an attempt to delay the hearing of the Petition in anticipation that the Company's reference under Section 15 (1) of the SICA will be registered with the BIFR and the stay under Section 22 of the SICA will operate in respect of the proceedings under the present Company Petition cannot be brushed aside. Again, the submission made on behalf of the Petitioner that the conduct of the Company is throughout not bonafide and the Petitioner is not at all ready to accept/rely on any suggestion made by the Company on any ground whatsoever, is fully justified in view of the following mala fide conduct of the Promoters/Directors of the Company since inception:
(i) The Promoters of the Company had admittedly not repaid the amounts due to the Petitioner/Bondholders under the 2011 Bonds as per the terms of the 2006 Offering Circular and the 2006 Trust Deed as well as under
the 2012 Bonds as per the terms of the 2007 Offering Circular and the 2007 Trust Deed and the Company has therefore defaulted in the repayment of the 2011 as well as 2012 Bonds. The Company by its notice dated 27 th December, 2010 called its EOGM on 29 th January, 2011, and in the Explanatory Statement annexed to the said notice inter alia represented to its shareholders that the Company is desirous of selling and/or leasing the business and/or divisions including the subsidiaries (wholly and partly) of the Company so as to redeem/re-pay the outstanding FCCBs which would become due for repayment/redemption in August, 2011 and August, 2012. The Company based ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -29- CP 28 of 2012 on its said representation obtained the mandate of its shareholders to sell and/or lease the business and/or Divisions including subsidiaries (wholly or partly) of the Company and in fact thereafter sold its MSD Business for a huge sum of US $ 54,712,461. However, after the sale of the MSD Business, the said representation made to the shareholders was brazenly breached by the Promoters/Directors of the Company and not a single paisa was paid to the Petitioner/bondholders towards the outstanding FCCBs. This shows that the Promoters/Directors of the Company dishonestly made a false representation to their shareholders that they will be selling the undertaking of the Company for making repayment of the FCCBs and thereafter defrauded the shareholders by not paying a single paisa towards the FCCBs despite sale of the MSD Business of the Company for US $ 54,712,461. It is the bounden duty of a Company to scrupulously follow and observe the mandatory provision of Section 173 of the Act, which is enacted in the interest of the shareholders. The Hon'ble Supreme Court in the case of Firestone Tyre and Rubber Co. vs. Synthetics and Chemicals Ltd. and others2 confirmed the observations of Justice Bhagwati in Sheth Mohanlal Ganpatram vs. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. 3 wherein Bhagwati, J. after holding that Section 173 of the Act enacted a provision which was mandatory and not directory, observed as follows:
"The object of enacting section 173 is to secure that all facts which have a bearing on the question on which the shareholders have to form their judgment are brought to the notice of the 2 1971 Vol. 41 Company Cases 377 3 (1964) 34 Comp. Cas. 777, 841 :AIR 1965 Guj. 96, 104 ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -30- CP 28 of 2012 shareholders so that the shareholders can exercise an intelligent judgment. The provision is enacted in the interests of the shareholders so that the material facts concerning the item of business to be transacted at the meeting are before the shareholders and they also know what is the nature of the concern or interest of the management in such item of business, the idea being that the shareholders may not be duped by the management and may not be persuaded to act in the manner desired by the management unless they have formed their own judgment on the question after being placed in full possession of all material facts and apprised of the interest of the management in any particular action being taken. If, therefore, there was any contravention of the provisions of Section 173, the meeting of the company held on 5th September, 1961, would be invalid and so also would the resolution passed at that meeting be invalid."
(ii) Despite the above sanctity/seriousness being known to the Promoters/Directors of the Company, as stated hereinabove, they nonchalantly proceeded to make a false representation in the explanatory statement dated 27th December, 2010, and defrauded the shareholders by selling a valuable asset/undertaking of the Company and thereafter did not make any payment from the consideration received therefrom towards the FCCBs, for which the mandate of the shareholders was obtained.
(iii) On 13th October, 2011, the Promoters/Directors of the Company made an announcement on the BSE that they have received the entire ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -31- CP 28 of 2012 consideration from the sale of the MSD Business except for the amount to be held in escrow and the Company plans to utilise the said consideration for partial repayment of FCCBs. However, no amount whatsoever was paid towards the repayment of FCCBs. It is therefore again established that the announcement made on the BSE by the Promoters/Directors of the Company was without any intention of making any payment towards repayment of FCCBs.
(iv) Emboldened by the repeated dishonest representations made to its shareholders by way of the explanatory statement dated 27 th December, 2010, and an announcement on the BSE dated 13 th October, 2011, the Promoters/Directors of the Company proceeded to make a false statement on oath, by filing an affidavit dated 17 th October, 2011, stating therein that the sale proceeds received by the Company will be applied towards buy back/redemption of FCCBs. Thus, it is established beyond any doubt that the Promoters/Directors of the Company had at all relevant times decided not to make any payment to the Petitioner/bondholders towards the FCCBs and at the same time sell a substantial division of the Company and empty the coffers of the Company by making false representations to the shareholders, to the BSE, to the Court and to the Petitioner/bondholders.
(v) The Promoters/Directors of the Company received an amount of US $
::: Downloaded on - 23/12/2013 20:34:55 :::
KPPNair -32- CP 28 of 2012
54,712,461 pursuant to the sale of the MSD business out of which the Promoters/Directors of the Company paid US $ 27 Million to Zenith FZE, Dubai ("the Dubai entity") and only an amount of US$ 27.12 Million was retained by the Company. The Company admittedly had not disclose to the shareholders that some part of the MSD Business was held by Zenith FZE, Dubai. Further, the paid up capital of Zenith FZE, Dubai was only AED 1,00,000/-, yet USD 27 million was paid to Zenith Dubai. As an afterthought the Company is claiming that a critical part of the MSD Business was held by Zenith Dubai. The schedules to the USA Asset Purchase Agreement dated 23 rd September, 2011 (USA APA) set out the "Purchased Assets" that have been transferred to the Purchasers. As pointed out by the Petitioner as and by way of illustration, page 21 of the Schedule - Exhibit A to Schedule 1.1 ( c ), lists out "Zenith Success Stories -
Managed Services". In this list there are several domain names listed and each of these domain relates to www.zenithinfotech.com which clearly indicates that the assets in such list is owned by Respondent Company - Zenith Infotech. On page 37 of the Schedule, details of the SAAZ Software are provided which the contract itself terms on page 37 " This (SAAZ Software) is by far the most important intellectual property as the SAAZ Software is what our resellers/MSP's pay for as well as it form the backbone of how service delivery to our resellers/MSP's are performed from our network operation centre in Mumbai, India." The fact that the SAAZ Software is developed by the Company and that it is the backbone of the delivery from the network operation of centre with ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -33- CP 28 of 2012 Mumbai clearly indicates that it is also owned by the Company. In any event, on page 93 it is shown that the trademark for SAAZ is owned by the Company.
On page 105 a list of material contracts are set out and each of such contracts are with the Company.
It is therefore clear that the primary seller of the Assets under the US APA is the Company ; no material asset was owned by the Dubai entity which was sold to the Purchasers ; there is no basis for paying around 50% sale consideration to the Dubai entity ; the payment to the Dubai entity in no way justifies payment of consideration of US $ 27 million. It is therefore evident that the Company has used the Dubai entity as a vehicle to siphon away the sale proceeds of the MSD business outside the jurisdiction of this Court.
(vi) Despite as stated aforesaid, the Promoters/Directors of the Company by representing to its shareholders, the BSE and to the Bombay City Civil Court that the consideration received from the sale of the MSD Business would be utilised towards the repayment of the FCCBs, not only siphoned away 50 per cent of the consideration to its Dubai entity as aforesaid, but without paying a single paisa to the Petitioner purportedly utilised the balance payment retained by the Company as follows:
(a) Purported payments to Standard Chartered Bank ("SCB") aggregating to US $ 12.6 Million (INR 61.7 crores) as more particularly set out in paragraph 30(A) (Page 25) of the Admission Order.::: Downloaded on - 23/12/2013 20:34:55 :::
KPPNair -34- CP 28 of 2012
(b) Purported investments/payments in/to related parties aggregating to US
$ 15.3 million (INR Rs. 74.2 crores approx.) as more particularly set out in paragraph 30(B) (Page 26) of the Admission Order.
(c) Other payments aggregating to US $ 23 million (INR 115 crores) as more particularly set out in paragraph 30 (C ) (Page 28) of the Admission Order. .
(vii) The Promoters/Directors of the Company therefore after repeatedly stating that they are selling/disposing of the Undertaking/Division to make repayment of FCCBs and even after the sale of the MSD Business stating that the consideration received will be utilised for repayment/partial repayment of the FCCBs, did not make any payments towards FCCBs to the Petitioner/bondholders, but instead in the aforestated manner siphoned away the consideration thereby defrauding its shareholders and its creditors including the Petitioners/bondholders. The Promoters/Directors of the Company after submitting a settlement proposal to the FCCB bondholders before the SAT on 17th June, 2013, made a corporate announcement on 19 th July, 2013 on the BSE website stating that, "The Board of Directors of the Company have formed an opinion to make a reference to the Board for Industrial and Financial Reconstruction ("BIFR") pursuant to the provisions of Sec. 15 (1) of the Sick Industrial Companies (Special Provisions)Act, 1985, as the accumulated losses have exceeded the networth of the Company as per the Audited Financial Results as at June 30, 2013" and a 400 page Reference was filed by the Company with the BIFR on 23rd July, 2013 which is not admitted till date. The Promoters/Directors ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -35- CP 28 of 2012 of the Company have therefore left no stone unturned in ensuring that no amount whatsoever is paid to the Petitioner/bondholders of the FCCBs despite an amount of approx. Rs. 600 crores being due and payable to them till date.
In the above circumstances, the Bondholders cannot be blamed for having lost complete faith and trust in the Company, its Promoters and Management, and for not being ready to trust their word in view of their past conduct of giving false assurances only to renege therefrom. In fact, as set out hereinabove, the Promoters/Directors of the Company have not only been dishonest with the Bondholders and the Stock Exchange but have also been dishonest with the Court, and as stated hereinabove made a false and dishonest statement on oath in its affidavit dated 17th October, 2012, filed before the City Civil Court inter alia stating that the sale proceeds received will be applied towards buy back/redemption of FCCBs and have thereafter not paid a single paisa to the Bondholders and have dishonestly utilized the said amounts as set out hereinabove. In fact, the Securities and Exchange Board of India ("SEBI") vide its interim order dated 25th March, 2013 ("SEBI order") recorded the following findings against the Promoters and Promoter Group of the Company and directed them to furnish a Bank Guarantee in the sum of USD 33.93 Million. The relevant portion of the said order is extracted hereinbelow:
"15..... I note that out of the sale proceeds of MSD Division of ZIL (USD 48 million), an amount of USD 33.93 million was diverted for the purposes that were not even remotely connected to the ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -36- CP 28 of 2012 authorization of the shareholders as under:
i. US$ 13 million transferred to VU Dubai & Cloud Dubai; ii. US$ 7.2 million and US$ 3.2 million transferred to Zenith Singapore;
iii. US$ 1.53 towards purchase of capital goods by Zenith Dubai;
iv. US$ 6 million to business creditors of ZIL;
The sequence of events and pattern of transactions in this case prima facie indicate that the ZIL and its promoters/directors not only wantonly defaulted in redemption of FCCBs and disregarded shareholders' resolution but also adopted fraudulent device and artifice to defraud the shareholders..
16. It appears from the above that ZIL and its promoters/director through their decision and announcement dated December 27, 2010 made a promise to the shareholders without intending to perform the same. They diverted the monies realized from the sale of the MSD Division for the benefits/interests of promoters and/or Directors and subsidiaries... I also do not see any compelling reasons to use the monies realized from sale of MSD Division for any purpose - not the least for paying to group entities for various purposes - other than for redemption of FCCBs, which was not only the sole purpose for which approval of shareholders was taken but was also very crucial for protecting the shareholders' value. The above facts and circumstances of the case, prima facie, indicate that the ZIL and its promoters/directors employed a device or artifice to fraudulently divert the sale proceeds of its MSD Division.
21. In light of the aforesaid prima facie findings, I note that the promoters/directors of ZIL have in a devious manner attempted to ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -37- CP 28 of 2012 take away the assets of a listed company directly and indirectly for their own benefit or for benefit of entities owned and controlled by them. Such conduct of promoters/directors not only defeats the whole purpose of seeking shareholders' approval for crucial decisions but also jeopardizes the integrity of the securities market.
25. The board of directors of ZIL is hereby directed to furnish within 30 days from the date of this order, bank guarantee(s) of a minimum tenure of one year, for USD 33.93 million (i.e. the amount of sale proceeds of MSD Division that has been diverted as described in para 15 above), in the name of Securities and Exchange Board of India, without using the funds of ZIL or creating any charge on assets of ZIL".
As set out hereinabove, despite the Hon'ble Supreme Court having extended the time to enable the Promoters/Directors of the Company to furnish the Bank Guarantee as required under the SEBI Order, the Promoters/Directors have failed and neglected to provide the Bank Guarantee till date. I am therefore not inclined to defer the hearing or the decision on the Company Petition as submitted/suggested by the Company.
40. The Petitioner is also correct in its submission that even if the CC Business were to be sold, the value thereof as per the Valuation Report of Ernst and Young dated 3rd July, 2012, is in the region of about Rs. 196 crores - Rs.
211 crores (which is approximately USD 31.6 Million - USD 34 Million as per ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -38- CP 28 of 2012 the conversion rate on November 19, 2013). The Land and Building and other immovable property of the Company belong to MIDC and a sale would require their permission as well as payment of premium which would devalue the property and delay matters indefinitely and that in any event, the sale of the CC Business and other assets would not be sufficient to satisfy the claim of the bondholders, which as on date is over USD 101.57 Million and a winding up order is inevitable. In response, the Company has contended that the value of the CC Business has gone up due to the fall in the value of the Indian currency as compared to the US Dollar, and that nearly all the Company's revenue comes from overseas customers. The Company has further submitted that it is confident that if the CC Business is sold as a running business without passing a winding up order, it will fetch more than the claim of the Petitioner. The Petitioner is correct in denying and disputing this contention advanced on behalf of the Company and the same cannot be accepted for the following reasons:
(i) The above submission of the Company is entirely without merit and has no credible financial basis whatsoever. It is inconceivable that an approximately 20 per cent depreciation in the value of the Indian Rupee can lead to a three-fold increase in the value of the CC Business.
(ii) The Company has in its reference dated 22 nd July, 2013 filed with the BIFR represented at page 12 that its net worth has been eroded, such that its accumulated losses are more than its net worth, necessitating protection from BIFR.::: Downloaded on - 23/12/2013 20:34:55 :::
KPPNair -39- CP 28 of 2012
(iii) The financials of the Company admittedly make it clear that the CC
Business is a loss making enterprise and its EBIDTA has been continuously
depreciating over the past two years while its accumulated losses have been continuously appreciating during the said period.
(iv) The present case is one where there is an admitted debt, admitted insolvency and admitted default on the part of the Company. It would therefore be an exercise in futility and in nobody's interest to defer hearing of the Company Petition until the CC Business and/or the other assets of the Company are sold.
41. The Company has also submitted that the winding up of the Company would (i) affect the employees who would lose their jobs; (ii) prejudice the shareholders; and (iii) result in the Company being unable to recover its various outstanding dues, including payments in respect of warranties provided by the Company to its various customers, which would become payable only after expiry of the warranty period. Though I am satisfied that the employees have been put forward by the Company with an oblique motive of protecting its own interest, and the interest of the employees and the concern shown with regard to the employees loosing their jobs is a mere pretence on the part of the Company, I have no doubt in my mind that the jobs/employment of the employees should be uppermost in the mind of the Court at the time of passing an order directing winding up of a Company. However, I also cannot lose sight ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -40- CP 28 of 2012 of the fact that the winding up process cannot be delayed on the ground that the employees may loose their jobs because when an organization like the present Company is headed by dishonest Promoters/Directors who have a single point agenda viz. their self-interest, they may with the passage of time bring the Company to such a state that the employees may not even get the fruits of their toil put in for several years viz. their terminal benefits, which it is at least possible to secure at this point of time. However, I have noted and appreciate the stand taken by Mr. Dwarkadas, the learned Senior Advocate appearing for the Petitioner, that as suggested by Mr. Shailesh Shah, the learned Senior Advocate appearing for the employees, the Court whilst passing an order of winding up of the Company may consider a stay of the said order for a particular period, with the necessary safeguards and directions to the Administrator already appointed by this Court to dispose of the CC Business of the Company as a going concern within such period.
42. In respect of the issue of recovery of outstanding dues of the Company including payments towards warranty/services, it is noted that apart from a bald statement in the affidavit in reply, no particulars or details have been furnished by the Company with regard to the alleged warranties/services. Hence the aforestated submission of the Company in that regard cannot be accepted.
43. It is submitted on behalf of the Company that there has been no ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -41- CP 28 of 2012 siphoning of money by the Promoters of the Company. The submission is incorrect. This Court has already set out in its Admission Order dated 30 th July, 2013 and reproduced the relevant paragraphs hereinabove showing how monies were fraudulently transferred by the Company to its related parties in Dubai and Singapore with a view to keep it outside the reach of the Petitioner and this Court. As mentioned above, the SEBI by its order dated 25 th March, 2013, has also given its findings with regard to the fraudulent siphoning of funds by the Promoters/Directors.
44. It is submitted on behalf of the Company that merely because the Company Petition has been admitted, it does not necessarily mandate a final order of winding up of the Company. The Petitioner has submitted that the detailed admission order passed by this Court dated 30 th July, 2013 has been confirmed by the order of the Hon'ble Division Bench dated 2 nd September, 2013 and the SLP preferred therefrom has been dismissed as withdrawn by the Company by an order of the Hon'ble Supreme Court dated 30 th September, 2013.
It is submitted by the Petitioner that the said order/judgment though passed at the admission stage are binding even at the final hearing of the Company Petition. It is submitted that the orders do not merely record any prima facie view. Instead the findings in the orders have been made after considering all the facts and circumstances on record, the averments made, the arguments advanced and the evidence led on behalf of both the parties to the Company ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -42- CP 28 of 2012 Petition. It is also submitted that since the SLP has been dismissed and the employees have chosen not to challenge the Division Bench order, the findings therein and in the admission order have become final and binding. Apart from the fact that I am in agreement with the submissions advanced by the Petitioner, in my view, the facts and circumstances on the basis of which I have passed the admission order dated 30th July, 2013, have remained the same till date and do not call for any different findings at this stage than those arrived at during the stage of admission. I therefore once again confirm all the findings arrived at by this Court in the admission order dated 30th July, 2013.
45. The Company has also pressed the arguments and contentions advanced at pages 801 to 813 of the affidavit in reply. The same is almost a repetition of what was submitted by the Learned Senior Advocate appearing for the Company at the stage of admission and is already dealt with in the admission order dated 30th July, 2013 and herein.
46. The Company has next submitted that the Petitioner has not made out adequate grounds to mandate the winding up of the Company. In support of its contention, the Company has relied upon the judgments of the Hon'ble Gujarat High Court in Tata Iron & Steel Company vs. Micro Forge (India) Ltd. 4 and American Express Bank Ltd. v. Corehealth Care Ltd. 5 . In my view, the 4 (2001) 104 Comp Cas 533 5 (1999) 96 Comp Cas 841 ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -43- CP 28 of 2012 Company cannot draw any support from the said judgments since the said judgments were passed before the judgment of the Hon'ble Supreme Court in the case of IBA Health (India) Pvt. Ltd. vs. Info-Drive Systems Sdn. Bhd. 6 which holds the field as on date. In the said judgment, the Hon'ble Supreme Court in paragraph 24 observed thus:
"24. A determination of examination of the Company's insolvency may be a useful aid in deciding whether the refusal to pay is a result of the bona fide dispute as to liability or whether it reflects an inability to pay, in such a situation, solvency is relevant not as a separate ground. If there is no dispute as to the Company's liability, the solvency of the Company might not constitute a stand alone ground for setting aside a notice under Section 343 (1) (a), meaning thereby, if a debt is undisputedly owing, then it has to be paid. If the Company refuses to pay on no genuine and substantial grounds, it should not be able to avoid the statutory demand. The law should be allowed to proceed and if demand is not met and an application for liquidation is filed under Section 439 in reliance of the presumption under Section 434 (1) (a) that the Company is unable to pay it debts, the law should take its own course and the Company of course will have an opportunity on the liquidation application to rebut that presumption."
This Court has noted that the Company has failed to rebut the presumption of its insolvency and is therefore liable to be wound up. In the present case where the Company is unable to pay its debts as and when due, has admittedly committed a default in the payment of the amounts due under the 2011 Bond 6 (2010) 10 SCC 553 ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -44- CP 28 of 2012 and the 2012 Bonds and is admittedly insolvent, an order for winding up of the Company must follow as a matter of course. The judgments of the Hon'ble Gujarat High Court referred to above are therefore, with respect, not binding or relevant for determination of the facts, circumstances and issues arising in the present case. The Petitioner is correct in submitting that the Company has failed to rebut the presumption of insolvency and is therefore liable to be wound up.
47. It is also submitted on behalf of the Company that insofar as the wrongful and illegal acts of Directors and Promoters are concerned, SEBI is investigating into the same and therefore it was not necessary for this Court to take cognizance of the conduct of the Directors and Promoters in determining whether the Company ought to be wound up. In response, the Petitioner has correctly relied upon the judgment of the Hon'ble Supreme Court in D.D.A. vs. Skipper Construction Company (P) Ltd. 7 wherein the Hon'ble Supreme Court in paragraph observed as follows:
"28. The concept of corporate entity was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people. Where, therefore, the corporate character is employed for the purpose of committing illegality or for defrauding others, the court would ignore the corporate character and will look at the reality behind the corporate veil so as to enable it to pass appropriate orders to do justice between the parties concerned.
7 (1996) 4 SCC 622
::: Downloaded on - 23/12/2013 20:34:55 :::
KPPNair -45- CP 28 of 2012
The fact that Tejwant Singh and members of his family have created several corporate bodies does not prevent this Court from treating all of them as one entity belonging to and controlled by Tejwant Singh and Family if it is found that these corporate bodies are merely cloaks behind which lurks Tejwant Singh and/or members of his family and that the device of incorporation was really a ploy adopted for committing illegalities and/or to defraud people."
In the light of this, it is futile for the Company to distance itself from the actions of the Promoters and Directors who admittedly hold almost 65% of the shareholding of the Company and who have been found by the SEBI and this Court to have diverted large sums of the money realized from the sale of MSD Business to corporate entities situated in Dubai and Singapore. Consequently the illegal and mala fide acts of the Promoters and the Directors of the Company are relevant and material to determine whether to pass an order for winding up of the Company.
48. In the circumstances, none of the defences/pleas raised by the Company have any merit. Given the fact that (i) the Company's liability is admitted, (ii) the Company is unable to pay its debt as and when they fall due and (iii) the Company is admittedly in a state of insolvency, all the criteria required for its winding up are fully satisfied. Therefore the Company ought to be wound up.
49. In view thereof, the Company, Zenith Infotech Limited, is directed to be wound up. The Official Liquidator, High Court, Bombay, is appointed as ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -46- CP 28 of 2012 Liquidator of the Company with all the powers prescribed under the provisions of the Companies Act, 1956. However, the winding up order is stayed upto 16 th April, 2014, in order to facilitate the possible sale of the CC Business of the Company as a going concern so as to ensure that the employees of the Company associated with the said business do not loose their employment or any benefits related thereto, and also the sale of properties and assets of the Company if so required. The Administrator appointed under the Admission Order shall continue for the purpose of the sale of the CC Business and if necessary also for the properties and the assets of the Company. The terms of his appointment and the scope of his duties shall be as set out in the Admission Order and hereinafter The sale of the CC Business as well as the assets of the Company shall be conducted on the following terms:
(i) The Administrator shall offer the CC Business for sale in a public auction, which auction shall be widely advertised in national newspapers as well as in the international press;
(ii) The Administrator is granted liberty to seek the assistance of any Investment Bank as also an independent law firm of repute in Mumbai to assist him in the sale process and the legal issues arising out of the sale of or related to or associated with the sale of the CC Business.
However before the appointment of the Investment Bank and the law firm, the approval of this Court shall be obtained;
(iii) The Investment Bank and the law firm so appointed by the Administrator
::: Downloaded on - 23/12/2013 20:34:55 :::
KPPNair -47- CP 28 of 2012
after seeking the approval of this Court shall conduct a financial, accounting, business, legal and customer relation due diligence of the CC Business and also prepare an Information Memorandum. The Company and its Promoters shall be required to co-operate in the process of preparation of the Information Memorandum and for the purposes of requesting the due diligence exercises to be undertaken. As part of the sale process, the Company shall also prepare management meetings, meetings with customers, bidders and such other measures which are customary in transactions of such nature ;
(iv) No related party or affiliate of the Promoter or Promoter Group shall be entitled to participate in the bid for the proposed sale of the CC Business. The term 'related party' shall have the same meaning ascribed to it in Section 2 (76) of the (Indian) Companies Act, 2013 and also include 'associate' as defined under the Income Tax Act, 1961;
(v) The Petitioner, Instructing Bondholders (as such persons are identified to the Company by the Petitioner from time to time) shall also be at liberty to solicit potential buyers and be actively involved in the sale of the CC Business and shall for this purpose have access to due diligence materials and reports produced by the Administrator, Auditors and Investment Bankers and to also attend all meetings with the Administrator, the Investment Banks and the law firm and also to put forth their views. If any other documents/records are required by the ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -48- CP 28 of 2012 Petitioners, Instructing Bondholders, the Petitioner shall be at liberty to apply to this Court and obtain necessary directions;
(vi) The CC Business shall be sold as a going concern to the highest bidder ;
(vii) The costs for the sale of the CC Business including all costs for appointing Advisors shall be borne by the Company;
(viii) In the event of the amount received from the sale of the CC Business being insufficient to satisfy the claim in the Company Petition, the Administrator shall be entitled to sell the other immovable properties and fixed assets of the Company situated at various locations in Mumbai and U.S., as disclosed in the Affidavit dated 10 th May, 2012 including (a) land and buildings situate at 30 MIDC Road, Andheri (West), Mumbai-400 093; (b) an Industrial Gala at SEEPZ, Andheri, Mumbai; (c ) furnitures and fixtures; (d) factory and office equipments;
(e) electrical fittings; and (f) computers (hardware and software) by public auction after a valuation being carried out by an independent valuer who will fix the reserve bid, with the sale being carried out under the supervision of Administrator. In this context, the Administrator shall be entitled to seek assistance of the same independent law firm appointed to sell the CC Business, to assist him on any legal issues arising out of the sale of or related to or associated with the sale;
(ix) The entire process of sale shall be completed on or before 16 th April, 2014;
::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -49- CP 28 of 2012
(x) It shall be the responsibility of the Promoters and Directors of the
Company to obtain the necessary approvals, consents and permissions as may be necessary to effectuate the sale of the CC Business and the immovable properties and fixed assets of the Company and to keep the Administrator informed about the status and progress of the same;
(xi) The Company, its Promoters and Directors shall co-operate with the Petitioner, the Instructing Bondholders (as such persons are identified to the Company by the Petitioner from time to time) and the Administrator to effectuate sale of the CC Business and the Company's immovable properties and fixed assets in a timely manner during the period set out herein;
(xii) The Petitioners and the Instructing Bondholders along with their Counsel shall be permitted to attend, participate and put forth their views in the meetings with the Administrator in respect of the sale of the CC Business and the immovable properties and fixed assets of the Company;
(xiii) In the event of the sale proceeds from the CC Business and the sale of other immovable properties and fixed assets being insufficient to fully satisfy the claim raised in the Company Petition, then the order winding up the Company shall forthwith become operative without any further orders and the Official Liquidator shall forthwith take charge of the affairs of the Company;
::: Downloaded on - 23/12/2013 20:34:55 :::KPPNair -50- CP 28 of 2012
(xiv) The gross proceeds from the sale of the CC Business and the immovable properties and fixed assets shall be deposited with the Prothonotary and Senior Master of this Court, who shall on receipt of the same, forthwith invest the same from time to time in fixed deposit(s) of a nationalized bank, initially for a period of two months and thereafter renew the same as directed by this Court;
(xv) In the event of the sale proceeds received from the sale of the CC Business and/or the sale of the immovable properties and fixed assets being sufficient to fully satisfy the claim raised in the Company Petition by the Petitioner, the Administrator shall through publication in local newspapers viz. Free Press Journal (in English) and Nav Shakti (in Marathi) invite claims from the creditors of the Company;
(xvi) In the event of the Administrator receiving claims which along with the claim of the Petitioner exceeds the amount received by way of sale consideration of the sale of the CC Business and the sale of the immovable properties and fixed assets of the Company, then the present order of winding up of the Company shall forthwith be made operative without any further orders and the Official Liquidator shall forthwith take charge of the affairs of the Company. However, if the Petitioner's present claim along with the other claims received can be satisfied from the sale proceeds of the CC Business and the sale proceeds of the immovable properties and fixed assets of the Company, the same shall ::: Downloaded on - 23/12/2013 20:34:55 ::: KPPNair -51- CP 28 of 2012 be disbursed to the Petitioner as well as other creditors to the extent of their claim, and the order of winding up of the Company shall stand set aside and the surplus if any shall be handed over to the Company.
50. The above winding up Petition along with Company Application No. 66 of 2012 and Company Application (L) No. 544 of 2013 is accordingly disposed of. However the Parties shall be at liberty to move this Court for necessary directions if required, for compliance/implementation of this order.
ig (S.J. KATHAWALLA, J.)
::: Downloaded on - 23/12/2013 20:34:55 :::